An Innovative Finance ISA (IFISA) is an opportunity to earn a tax-free return by investing in peer to peer lending. Here is a comprehensive IFISA guide that may help you know what IFISA is and how it works.
What Is An IFISA
An IFISA is a new type of individual savings account (ISA) that helps investors to use their tax-free allowance by investing in Peer to Peer lending. This type of ISA is different from other types as it contains p2p loans instead of stocks as in investment ISA and cash as in cash ISA. P2P investment is a form of investment in which borrowers and lenders connect through an online platform and cut out the middleman or any financial institution. A borrower might be an individual, business or property developer. The investor lends his money for a specific time and, in return, gets an interest with the amount lent. In terms of risks and rewards IFISA sits between cash ISA and stock and share ISA.
How Does It Work
An Innovative Finance ISA works by lending your money to borrowers and in return you will get an interest rate along with the actual amount. The interest rate depends on the time for which you want to invest your money and type of loan. You have a tax-free allowance of £20,000 each tax year and you can invest all the allowance in IFISA if you want to.
How To Invest In IFISA
There are many IFISA providers in the UK. Almost all the platforms that offer peer to peer lending use the term P2P ISAs for this product. These platforms allow you to lend money to infrastructure development, businesses or consumers and receive a tax-free interest. You should choose a platform that has a good track record and transparency about lending strategies.
It is relatively easy to create an Innovative finance ISA at any platform. Open an online account within minutes and transfer the amount you want to invest. You can choose the borrowers manually, and some platforms automatically lend your money to multiple borrowers. Eventually, you will start receiving monthly payments. Keep on investing to earn more interest.
A Worthwhile Addition To Your Portfolio
An IFISA can be a valuable addition to your portfolio because of several reasons:
- The risk spectrum of IFISA is sitting between the Cash and stocks and share ISA. Because, unlike cash ISA, you have a risk to lose all your investment and may receive a lower return than what you expected. However, unlike stocks and share ISAs, you may not face the regular risk of fluctuation in interest rates.
- In IFISA, you have more control over your money as you can choose an individual or business you want to support financially. While in a savings account and fund manager, you have little knowledge of what is happening to your investment.
- You can plan your investment in IFISAs more efficiently because they offer decent returns within a fixed time period.
- IFISAs are least affected by market volatility as they have no relation with the stock market.
- In a low-interest-rate environment, a peer to peer lending platform offers high-interest rates that may help you to beat inflation.
Always bear in mind that investing in Innovative Finance ISA is not free of risk. Your capital is at risk as there is no FSCS security available on P2P loans.
You Can Transfer Existing ISAs to IFISA
It is allowed to withdraw some or all Cash that you have in stock and shares ISA or in Cash ISA and can put it in an IFISA. In case you want to transfer from the stocks and shares ISAs, you have to liquidate your assets and then transfer the Cash. You may have to pay fees to liquidate your assets and also choose whether it is a perfect time to sell them or not. Moreover, cash transfers may take 1 to 2 weeks, and once the Cash is transferred, you can start lending and earning tax-free income.
Number Of IFISAs You Can Have
You can have only one IFISA account per tax year. A tax year runs from 6th April to the 5th April. You can transfer to a new IFISA provider in the next year, or you can leave your existing amount and open a new one in the next year.
How Much You Can Earn Tax-Free From IFISA
No matter if you are a basic rate taxpayer or a high rate taxpayer, you can earn tax-free interest as a part of your personal savings allowance.
A high rate taxpayer can earn £500 tax-free interest, while as a basic rate taxpayer, you can earn £1,000 tax-free interest. Before getting an Innovative Finance ISA, you should keep in mind your tax bracket.
We hope that this article will help you to understand innovative Finance ISA and how you can earn a tax-free interest through peer to peer lending. Keep in mind that you should choose a platform that is FCA authorised and has a good risk management strategy.